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An official with the Korea National Oil Corp. studies a graph of oil price trends on Thursday, when the price of international crude struck a record high of US$110 a barrel at one point.
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South Korea's economy is heading toward a mire of "three highs": a high won-dollar exchange rate, high international oil prices, and high prices. With these three variables rising simultaneously, local businesses face the risk of higher costs and have less desire to make new investments. President Lee Myung-bak's "MBnomics," which aims to reinvigorate the economy by galvanizing corporate investment, has hit a roadblock even before getting off to a good start.
The won-dollar exchange rate is now standing at the threshold of W1,000 per dollar, a 26-month high. A high rate is good for exporters because it can increase price competitiveness, but it's a hardship for importers who have to pay more for imported goods. It's also a strain on low-income people because it leads to higher consumer prices.
According to the Bank of Korea, consumer prices will increase 0.07 percentage points if the won-dollar exchange rate rises 1 percent. In fact, consumer prices have climbed as much as 0.65 percentage points as the exchange rate has risen approximately W84 since November last year.
The yen-dollar exchange rate has dropped, while the yen-won exchange rate has risen higher. This has placed a heavy burden on many South Korean businesses that rely on yen-denominated loans. The outstanding balance on yen-denominated loans at five major banks -- Kookmin Bank, Woori Bank, Shinhan Bank, Hana Bank, and the Industrial Bank of Korea -- totaled 862.8 billion yen as of the end of February.
Simply put, businesses have suffered debts of more than W2 trillion (US$1=W982), given that the yen-won exchange rate has soared about 30 percent since July last year.
In addition, soaring international crude oil prices are posing a threat to the entire South Korean economy. The price of West Texas Intermediate crude climbed above $110 a barrel at one point. The price of Dubai crude, which South Korea relies on heavily, will likely reach $100 a barrel soon. South Korea's economic operation plan for 2008 -- which was drawn up after estimating the average price of Dubai crude at $80 a barrel -- is now running up against a big brick wall.
Global investment banks predict that the average international oil price will rise each year, to $95 per barrel in 2008, $105 in 2009, and to $110 in 2010.
The rise in commodities prices, which began in the fourth quarter of 2007, is putting pressure on businesses. Amid soaring prices, conflict has flared up recently between conglomerates and their subcontractors over the increase of subcontractor prices.
At the persistent request of subcontractors, Hyundai Motor on Thursday took an urgent measure to increase subcontractor prices by 20 percent. Such a move in the manufacturing industry is a forewarning that prices of industrial products will also rise in the wake of a series of price increases for foodstuffs.
Price hikes will likely affect businesses most seriously, as workers are expected to call for wage raises. Citing soaring commodities prices as an excuse, the Federation of Korean Trade Unions and the Korean Confederation of Trade Unions are calling for 9.1 percent and 8.0 percent pay raises, respectively, for this year.
The problem is, all of the "three highs" are external variables that South Korea can do nothing about. Neither the government nor businesses have the means to bring them under control. And the trend will likely continue, as it is a structural economic phenomenon on a global scale. Under these circumstances, domestic and foreign economic think-tanks have cut their forecasts for South Korea's economic growth this year.
Yoo Byung-kyu, a managing director of the Hyundai Economic Research Institute, said, "The only way to survive is to boost growth by galvanizing domestic consumption and proactively reinvigorating corporate investment."
(englishnews@chosun.com )
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